Dr. Copper's Red Metal Elixir

Do you take diet or nutritional supplements? It could be as simple as popping an everyday vitamin pill from the many choices at the supermarket. Or perhaps you frequent one of those high-end stores where they have the super-duper top-shelf nutritional and homeopathic remedies.

If you take these kinds of supplements, there are a couple of things that I’m sure you know. You won’t cure what ails you by just taking one pill once. And you could do yourself harm by swallowing an entire bottle of some otherwise “healthy” elixir.

So what’s the secret to success in this arena? Pick your pills carefully. Look for the supplement that suits your needs. Then buy a jar that contains enough product that you don’t have to make frequent resupply runs to the drug store. But don’t buy the extra-large, giganto-jumbo-size package, lest the product go stale over time.

Plus, you have to take the pills regularly. Find a routine. Usually, you take a dosage every day, or every other day. You want your body to get used to a certain level of the particular vitamin or supplement. But the key is to build it into your schedule. Don’t go for a week or two on the meds and then go for a time when you forget about it.

So what does this have to do with investing? It’s my way of getting into a discussion of commodity cycles, and particularly of investing in copper. You want to get in at a good time, and hang in there over the long haul. That’s the healthy way to build your portfolio over time.

Adding Copper to Your Diet

Copper? Didn’t the metal fall victim to a precipitous mid-year fall in 2012, you may be wondering? Isn’t the Chinese economy slowing down? Won’t that drag down copper prices and hurt the share price of copper mining firms?

It’s true that copper prices drifted down in the middle of last year – from a high around $4/lb to a low closer to $3/lb. Indeed, share prices of many copper miners followed this same downturn.

Now, however, if you follow the charts, copper prices are recovering. And yes, the Chinese economy has slowed down, but only in some sectors. Other parts of the Chinese economy are going strong.

In particular, the Chinese are building out a massive electrical grid across their country. This project requires many thousands of tonnes (metric tons) of copper. It’s not a high-visibility story, like the North Koreans firing a missile or something. But stringing copper wires across China is a daily fact of the world’s economic life. It’s very good for copper.

Not long ago, I was in Toronto at a conference on “technology metals.” These include elements like uranium for nuclear power, lithium for batteries, rare earths for magnets and electronics. And much more.

One of the speakers was a well-known U.S. metals consultant named Jack Lifton. Mr. Lifton stood at the podium and casually mentioned — almost in passing — that “the next worldwide metals crisis will be a shortage of copper.”

Mr. Lifton explained, “Copper forms the nerves of our civilization. The copper crisis will make the current rare-earth crisis look minor by comparison.”

According to Mr. Lifton, the global copper industry isn’t increasing output nearly as fast as demand for the red metal is growing. “Just China alone is building a new grid for half a billion people.”

Mr. Lifton continued, “That’s like doing North America all over again, from scratch, and then some. Everything depends on moving electrons around on copper wire. And we’re approaching the point where there’s not enough copper to make enough wire.”

The Copper Industry Investment Cycle

Mr. Lifton’s comment helps illustrate a point about industries with high levels of capital expenditure. These kinds of businesses have unique dynamics. That is, some industries move through upturns and downturns unrelated to broader economic fluctuations, such as the normal business cycle. This is certainly the case in the mining industry, especially for critical metals like copper.

In the olden days, most copper came from underground mines, where workers used picks and shovels to chop high-grade ore out of veins. But as world copper demand increased in the 20th century, the industry evolved.

Now most of the world’s copper comes from about 30 very large mines. These are almost all massive pits — just immense, deep holes in the ground. The ore grades in the pits tend to be low, which necessitates moving large tonnages of rock to the crushers. That is, a copper miner has to dig a lot of low-grade rock to refine enough product into copper metal for sale.

Another way of saying it is that copper is energy and capital-intensive. A typical mine requires a large array of mechanical equipment, such as large earthmoving machines, rock-crushers, grinders and all manner of chemical and metallurgical processing stations. Basically, the rolling equipment burns large amounts of diesel fuel, hauling rock and such. The stationary equipment spins due to the use of vast amounts of electricity.

The Era of Underinvestment

It takes money, equipment and management to set up a new copper mine. It also requires time — 10–15 years — to go from an undeveloped prospect to a full-up operating mine.

When Jack Lifton said that there’s not enough new copper coming online to make all the copper wire that the world needs, he was referring to an issue that has plagued the world over the past 30 years. It’s been an era of underinvestment. For a variety of reasons, since the 1980s, there hasn’t been nearly enough investment in new exploration, and certainly not in new mine development.

The result of underinvestment is that about 20 of the world’s largest copper mines are on their last legs. That is, they have perhaps 10–20 years of mine life remaining. If you do the math, that means that copper companies across the world need to start building many new mines right about now. But that isn’t happening.

We’re past the point where anybody can just send a few more big trucks down into the big pits. Now, we need new mines, and they’re not out there in anything like the number and scale the copper market needs.

This scarcity is going to hit the market sooner rather than later — inside of 36 months, 60 months on the outside.

Right now, copper supply is about equal to demand — allowing for growing inventories in China, balanced with shrinking inventories most everywhere else that doesn’t have state banks paying the carrying cost for inventory.

When the rest of the world begins any sort of economic recovery — and increases use for copper — the demand side will quickly overcome the supply side.

We’ll see copper move from $3.75- $4/lb to the $6 and $8/lb range. A double and more, for starters.

Does the future favor copper miners? You bet.

For now, my advice is to buy a modest-sized jar of Dr. Copper’s Red Metal Elixir. Build a position in your favorite copper miners for the long haul, to benefit your financial health.

About Byron King:

Byron King is a Senior Geologist at Rickards’ Gold Speculator. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.